If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Zhejiang Wellsun Intelligent TechnologyLtd (SZSE:300882) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Zhejiang Wellsun Intelligent TechnologyLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.10 = CN¥92m ÷ (CN¥1.2b - CN¥311m) (Based on the trailing twelve months to September 2022).

So, Zhejiang Wellsun Intelligent TechnologyLtd has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Electronic industry.

Check out our latest analysis for Zhejiang Wellsun Intelligent TechnologyLtd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Zhejiang Wellsun Intelligent TechnologyLtd's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Zhejiang Wellsun Intelligent TechnologyLtd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Zhejiang Wellsun Intelligent TechnologyLtd has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Zhejiang Wellsun Intelligent TechnologyLtd's ROCE

While returns have fallen for Zhejiang Wellsun Intelligent TechnologyLtd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 50% to shareholders over the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, Zhejiang Wellsun Intelligent TechnologyLtd does come with some risks, and we've found 1 warning sign that you should be aware of.

While Zhejiang Wellsun Intelligent TechnologyLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.